INSTITUTE FOR THE ECONOMY IN TRANSITION RUSSIAN ECONOMY: TRENDS AND PERSPECTIVES November 2006 MONTHLY BULLETIN Moscow 2006 Institute for the Economy in Transition, 1996.

5 Gazetny pereulok, Moscow 103918, Russian Federation Phone: (495) 203-88-16 Fax: (495) 202-42-24 E- Mail: todorov@iet.ru 1 Politico-Economic Outcomes of November 2006............................................................................... 3 Budgetary and Tax Policy.................................................................................................................. 5 Monetary and Credit Policy................................................................................................................ 9 Financial Markets............................................................................................................................ 11 The real sector of the economy: factors and trends............................................................................ 20 The IET Business Surveys: November 2006..................................................................................... 25 Foreign Trade.................................................................................................................................. 26 Factors of Economic Growth in 1996-2006...................................................................................... 29 Analysis of the Structure of Pension Deductions of Managing Companies........................................ 33 Provision of Medicines to Individuals Entitled to the Respective Benefits........................................ 38 Evaluative summary of the initial results of the functioning of the accumulative mortgage system for providing the RF military personnel with housing........................................... 40 The issues considered at the RF Government’s meetings on 2, 16 and 23 November 2006............... 44 An overview of economic legislation adopted in November 2006..................................................... A review of budget legislation adopted in November 2006............................................................... Politico-Economic Outcomes of November The central result of November 2006 became the signing by the US of the protocol of consent to Russia’s accession to the WTO (now that there are just Costa-Rica, Georgia and Moldova that Russia will have to deal with on the matter). The Russia-US negotiations have been lasting for more than years and concerned an array of problems. Partly they appeared quite rational (recognition of the US certification of meat products, opening in Russia branch offices of banks and insurance companies, civil aviation, among others), while others were fairly speculative (such as protection of intellectual property), thus being immediately on hand to justify for a political stance. Even in a highly likely case, should the US Congress recently seized by the Democrats fail to abolish the Jackson-Wenick clause (which provides for an annual revision of the US-Russia trade regime) and grant Russia with additional preferences, there no longer is a fundamental obstacle on its way to join the WTO. Now Russia looks forward to signing a multilateral agreement within next half-year. Mr. Putin’s sudden success (for Russia has de-facto fixed an already long matured swap of giving green light to opening branches of insurance companies for the refusal to open branches of Western banks, while now cancelled claims to the US meat had arisen only lately and, strangely enough, indeed pushed the US Administration to revise its stance) opens before Russian companies a simplified access to world markets and, equally importantly, to a sound system of international arbitration.

Nonetheless, Russia’s accession to the WTO to a significant extent appears dependant on the administration of the Organization and Georgia’s stand (Georgia had long signed the protocol, but Russia not only failed to honor requirements therein with regard to securing Georgia’s customs control within the sectors of its border currently controlled by the disloyal republics of South Ossetia and Abkhazia, but consequently imposed unprecedented bans on trade and communication with Georgia.

Although Russia believes the WTO procedures do not provide for a withdrawal of the protocol).

Should Russia refuse to compromise with the Georgians (who have nothing to loose on the matter), the most likely outcome would become a bureaucratic protraction of the problem for an uncertain period.

The breakthrough in Russia-US negotiations was partly overdarkened by the failure of the RussiaEU summit in Helsinki. The current agreement, which was signed in June 1994 and took effect in December 1997, will expire next year. Of the 25 EU members Poland appeared to be the only one that vetoed the European Commission’s mandate on a new round of negotiations with Russia. Officially, Poland raised two claims, that is, Russia’s embargo on Polish supplies of agricultural products and ratification of the Energy Chart. The Poles had withstood Russia and European Commission’s pressure and waved off suggestions to postpone the debate on Russian-Polish economic relations. Hence, no serious agenda of the Helsinki summit. The most likely scenario is reaching a compromise (Poland’s refusal to insist on ratification of the Energy Chart against lifting the ban on Polish agricultural supplies to Russia). However, given the emotional component, it might well happen that Russia will realize its threat, that is, to ban agricultural imports from all the EU countries and start a full-scale trade war.

However, at the Summit, Russia found itself in the epicenter of a pretty sudden and scandalous discussion. Mr. Putin had to stand uncomfortable questions concerning the death of Mr. A. Litvinenko, ex-FSB operative, political migr and author of books on FSB crimes. That was the second straight assassination of a staunch opponent to Mr. Putin. Plus, by contrast to the earlier assassination of Ms.

A. Politkovskaya, it does not bear any “trace”, nor it implies any visible enemies (which Ms.

Politkovskaya obviously had due to her investigations in Chechnya). Such a high crime committed in the territory of a country of the first world has caused a great resonance in Europe, which to a significant extent depends on evidence police would be able to get. In any case, this particular crime is critical for assessing Mr. V. Putin’s personality, both at present and in the future (in the event he leaves the office in 2008 and decides to move into energy business whose top managers do not enjoy the diplomatic immunity). While the official Russian propaganda disseminates theses of someone being keen to discredit Mr. Putin1, we may refer to an equally explicit conspirological version, that is, a considerable part of the present Russian Administration is at pains to block Mr. Putin’s desire to nominate a successor and leave for business.

In November, the RF Duma was to consider two bills, both aimed to fix control over power with the ruling group. Those were a bill submitted by a group of the United Russia’s faction led by Mr. V.

Mokry, head of the Committee on Self-Governance. The group proposed to abolish the institution of mayor elections in big cities. The other bill was submitted simultaneously by several committees and implied amendments to the election law. In a nutshell, they proposed to cancel the minimal threshold of appearance at polling stations and ban criticism against participants in the election process.

The first bill failed to pass the parliament. Mr. B. Gryzlov, the Duma Speaker and the UR leader argued that his party would not propone the bill the hearings of which were first scheduled for early November, but consequently were postponed for an uncertain period. There are several reasons for that. First, as Russia had signed the European Chart on Local Self-Governance, which in particular read election of mayors, the desire of the authors of the bill to fix the elections at the level of some “intracity territories” contradicts to both the spirit and the letter of the Chart. Plus, there exist a number of rulings of the Constitutional Court of RF, which in that case would have become subject to revision.

Second, if passed, the bill would not ensure additional benefits for the ”power vertical”, at least, in the short run, as the incumbent governors’ duties are based on their “old” powers, while the law enforcement agencies’ current powers appear sufficient to ensure an early dismissal of a mayor (upon the Kremlin’s consent). Third, the new cycle of parliamentary and presidential elections is just more than a year away, and the new procedures would imply, at least, an inevitable administrative chaos. Finally, some analysts have every reason to believe that the UR’s stand on the issue became an administrative failure of Mr. S. Sobyanin, Head of the presidential Administration, who had been advocating the bill.

This does not ultimately mean, however, a good night sleep for the Russian self-governance whose financial capacity keeps various levels of the power vertical in alert. It may well happen there would arise a renewed version of the bill that would grant governors with the power of a certain control over the municipal administrations’ powers and funding.

The State Duma managed to pass, in three readings, amendments to the electoral law, of which the most debated (though not the most critical) became the one on abolition of the threshold of appearance at elections of any level (during prior iterations the respective rate was lowered to 20%). Many countries, including the US, have no such thresholds in their law, and the emphasis on this limitation, in our view, makes the discussion overly theoretical. By contrast, the bill contains absolutely unprecedented clauses that prohibit to vote against anyone and expose negative consequences of coming to power of a rival, including a competing political party. Even the dissemination of information, “which helps establish a negative attitude towards a candidate or party list”, is recognized as an illegal activity. Such a ban undoubtedly turns elections into farce. On the other hand, the reality shows that the relation between the election law and the electoral process is loose, with the main factor being readiness (or its absence) of the ruling group to get rid of rivals by means of forensic procedures. For instance, even in the past, in compliance with the previous legal procedures, the court of law used to interpret promises of candidates in the event of their victory to take concrete step for the voters’ sake as their bribing and criticism of law enforcement agencies as “kindling of social discord”2. On the other hand, technologically, all the moves prohibited by the law can be pursued on behalf of initiative groups that are formally independent of an opposition candidate. In any case, an opposition candidate should seriously consider the scenario of delegitimization of elections, should the ruling group succeeds in withdrawing him from a race, for it is costs of this scenario that form a main factor on the basis of which a decision will (or will not) be made.

November 2006 saw the dismissal of Mr. A. Ryazanov, Deputy Chairman of the Board of Gasprom and President of Gaspromneft. He controlled gas supplies to the CIS countries, relations with regions, distributed quotas on access to Gasprom’s pipeline network and since 2005 has been the head of It is well known that in 1940, ”Pravda”, the CPSU daily, published a version of assassination of Mr. L. Trotsky “by one of his ex-fellows” on the grounds of a personal conflict.

As it was noted at the Mayor election in the city of Perm and that to the legislative assembly of Kaliningrad oblast in March 2006.

Gaspromneft (earlier known as Sibneft). His five-year contract expired and Mr. A. Miller did not extend it. One of a very few profile specialists in Gasprom, Mr. A. Ryazanov’s heyday was the return of Sibur, the gaso-chemical giant, under Gasprom’s control. His credentials seemed to extend with the last years’s nomination President of Gaspromneft. As a result of his dismissal, Presidency in Gaspromneft was reassigned to Mr. A. Dukov, the head of Sibur and Mr. A. Miller’s protge, while Mr. V. Golubev, the head of the Department of Investment and “Gascomplectimpex” and Mr. Putin’s fellow back in the days at the St. Petersburg Mayor’s office) succeeded to Mr. Ryazanov as Deputy Chairman of Gasprom. Mr. Golubev’s mandate will comprise granting access to Gasprom pipeline net to independent producers and, most likely, negotiations on gas supplies to the CIS (here he will have to compete with Mr. A. Medvedev, another Deputy Chairman of the Board). Underlying Mr. Ryazanov’s disgrace, as we believe, was that companies associated with Mr. R. Abramovich had remained among Gaspromneft’s traders, which aroused Gasprom owners’ suspicion.

In November, the Basmanny court of law of the city of Moscow sanctioned arrest of Mr. A.

Taranov, Director of the Fund of Compulsory Medical Insurance, and a number of his subordinates.

The General Prosecutor’s office suspects that they received bribes in exchange for placement of public orders on provision of complementary medicines provision. However, the consequent progress, including Mr. Putin’s meetings with Mr. M. Zurabov, excluded the version of a possible attack on the latter as the Fund’s curator. Thus, the main version is redistribution of funds allocated for compulsory medicines provision, over a half of which was transferred in favor of just two companies.

S. Zhavoronkov Budgetary and Tax Policy According to the tentative performance of the budget in terms of revenues as of October 2006, the level of revenue of the RF federal budget made 23.35 per cent of GDP; the expenditures of the federal budget accounted to 14.82 per cent of GDP, budget surplus has come up to 8.53 per cent of GDP.

Within January - August of 2006 the RF consolidated budget revenues made 35.4 per cent of GDP, consolidated budget expenditures made 24.8 per cent of GDP, and consolidated budget surplus accounted to 10.6 per cent of GDP. As of November 1, 2006 the volume of financial reserves of the RF Stabilization Fund made RUR 1.894.09 billion, as compared with RUR 1 730.6 on September 1 of the current year, which makes 7.8 per cent of GDP and 7.4 per cent of GDP accordingly versus accumulated GDP within January-October of 2006.